Big Bang

What is the Big Bang

The Big Bang refers to the day the stock market was deregulated in London, England. The event, in which the London Stock Exchange (LSE) became a private limited company, took place on October 27, 1986. It revitalized the LSE, allowing external corporations to enter its member firms, and automated price quotation was established.

BREAKING DOWN Big Bang

Before the Big Bang, the LSE was trailing the other major exchanges in the world. At the time, the New York Stock Exchange (NYSE) was the biggest market worldwide, determined by turnover rate. London was only able to turn over 1/13 of the volume transacted by the NYSE. The electronic trading system helped improve London's turnover rate because orders were now accepted by telephone and computer.

In 1983, Prime Minister Margaret Thatcher and her Conservative government decided to go through with the process of deregulating the city of London along with its banks. This was a priority for Thatcher’s government in order to free up the markets and because the LSE was embroiled in an antitrust case brought forth under the previous government by the Office of Fair Trading. At issue were the LSE’s rules on commissions, the independence of jobbers and brokers, and the lack of foreign membership from the exchange. Thatcher’s finance minister, Nigel Lawson, implemented the changes that resulted in the Big Bang on one single day: October 27, 1986.

The Big Bang witnessed many changes in the financial markets, including the removal of fixed commission charges, the distinction between stockbrokers and stockjobbers, and the switch from open-outcry to electronic trading. It was dubbed as such because of the expected rise in market volatility and activity on the day when changes in the structure of the financial market were made.

Financial Service Authority Established by the Big Bang

The changes created in the Big Bang led to even more significant changes in the financial markets throughout London. It was a time when large banks took over old firms. The changes created in the regulatory environment eventually led to the building of the Financial Services Authority (FSA) — the quasi-judicial body that regulated the financial services industry in the United Kingdom from 2001 to 2013.

Big Bang Policy

Prior to the Big Bang, the financial institutions that once dominated the city could not compete with foreign banking. Though still a global finance center, it had already been beaten by New York.

The Big Bang was one of the vital points of the U.K. government’s reform program. The reform program focused on the elimination of the city’s major problems: overregulation and the widespread practice of old boy networks. The solution the government found in the Big Bang provided the doctrines of free market competition and meritocracy.

Consequences of the Big Bang

Though the Big Bang may have triggered some revolutionary changes, it also had some negative effects. Due to the deregulation of the markets, the concentration of power was focused on the big companies that took over long-standing firms. This same change created by the Big Bang trickled throughout the financial systems around the world. Now, companies that are “too big to fail” dominate financial cities. This characteristic has turned financial centers fragile as seen in 2008 during the Great Recession.

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"Too big to fail" describes a concept in which the government will intervene in situations where a business has become so deeply ingrained in the functionality of an economy that its failure would be disastrous to the economy at large.